Blow to Chancellor’s budget plans as borrowing costs climb to three-month high

By JOHN-PAUL FORD ROJAS

Updated: 23:02 GMT, 27 March 2025

Borrowing costs climbed to a three-month high yesterday, in a blow to Rachel Reeves’s Budget plans a day after her Spring Statement.

Ten-year bond yields spiked above 4.8 per cent to reach their highest level since January 15 as Donald Trump opened a fresh front in his global trade war by announcing tariffs on car imports.

The Chancellor now looks to have already lost around half her £9.9billion of fiscal ‘headroom’ due to rising borrowing costs.

Oxford Economics said shifts on the bond markets since the Office for Budget Responsibility locked in its interest-rate assumptions in February had eroded it by £4.2billion by Wednesday night. 

And yesterday’s rise in yields is estimated to have reduced the headroom by a further £1billion.

It came as Trump’s latest tariffs reverberated through financial markets. Shares in car makers took a battering with Aston Martin hitting a record low, ending down 6.6 per cent, or 4.9p, to 68.7p. 

Targets: Chancellor Rachel Reeves (pictured) now looks to have already lost around half her £9.9bn of fiscal ‘headroom’ due to rising borrowing costs

Germany’s BMW, whose brands include Britain’s Mini, fell 2.6 per cent, India’s Tata Motors, which owns Jaguar Land Rover, slid 5.5 per cent and Vauxhall owner Stellantis dropped by 4.2 per cent.

The volatility also helped lift the price of gold, considered a safe haven asset, to a record high of $3,059. 

An increase in the yield on bonds – small parcels of government debt – is damaging to the Chancellor’s plans because it means the Treasury has to pay more to borrow.

The plans are highly sensitive to gilt yield movements because Reeves has left herself only a slim ‘headroom’ of £9.9billion to meet her fiscal rules. 

The Office for Budget Responsibility (OBR) has warned that if average gilt yields and Bank of England interest rates are just 0.6 percentage points higher than expected over the next five years, her headroom will be wiped out.

The OBR’s new forecast assumes gilt yields at 4.3 per cent this year, rising to 5.1 per cent by the end of the period.

Bonds – whose yields rise as their prices fall – have been under pressure globally, as Germany looks to ramp up borrowing massively to fund defence and infrastructure spending while President Trump drives up inflation fears with his swingeing import tariffs.

Yields on ten-year US bonds also rose yesterday, hitting a one-month high.

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Blow to Chancellor’s budget plans as borrowing costs climb to three-month high

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